Title

Do capital flows drive credit growth and consumption in Central and Eastern Europe?

Document Type

Article

Publication Date

1-2-2019

Abstract

Domestic credit expansion in CEE economies, fuelled in part by foreign capital inflows, helped increase household welfare before the 2008 financial crisis caused a contraction across the region. How strong are the linkages between the current account, domestic credit and consumer spending? This study compiles a quarterly dataset of domestic credit as a share of GDP for 11 CEE European Union members and isolates structural breaks in the series’ growth rates that often align with the 2008 crisis. Vector autoregressive methods, particularly impulse response functions, show that increased current-account deficits lead to increased consumption in six of the 11 countries and increased credit growth in three, and that shocks to credit growth increase consumption in six countries. Capital inflows significantly increase consumption through domestic credit in Slovenia, while the Baltics show a large share of significant effects.

DOI

10.1080/14631377.2018.1461516

Publication Title

Post-Communist Economies

Volume Number

31

Issue Number

1

First Page

36

Last Page

51

ISSN

14631377

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